Blackmores: Result 2016

Blackmores has reported a solid year of growth, particularly in China.

Blackmores has produced a record net profit of $100m – more than double last year's result – yet its share price fell 20% after management said that growth may be starting to slow.

Management said lower net profit is to be expected in the first quarter of the 2017 financial year. ‘The Australian wholesale market is volatile and has softened in recent weeks impacted by retailers destocking and some exporters changing the channels through which they acquire products,’ said chief executive Christine Holgate.

Other than that, it was an impressive result, which has become run-of-the-mill for the vitamin and supplement maker. Sales increased 52% to $717m thanks to strong demand, particularly in Asia, and this was matched by a doubling of production capacity during the year.

Year to June ($m) 2016 2015 /(–)
Table 1: BKL result
Revenue ($m) 717.2 471.6 52
EBIT ($m) 145.2 72.2 101
Net Profit ($m) 100.0 46.6 115
EPS ($) 5.80 2.70 115
Final dividend 210 cents, fully franked, (up 56%)
ex date 6 Sept

Sales to China increased sixfold to $48m with management saying that Blackmores benefited from the new Australia-China free trade agreement, which reduced import tariffs. The company’s BioCeuticals practitioner-only brand, which was acquired in 2012, also had a strong year of growth, with sales up 25%.

Vitamin manufacturing is a business characterised by economies of scale because a large proportion of costs are fixed manufacturing equipment. This gives Blackmores significant operating leverage, with higher volumes – and sales – resulting in a little more of each additional dollar falling to the bottom line. With this in mind, earnings before interest and tax (EBIT) doubled to $145m, with the company’s operating margin having steadily risen from 14% a decade ago to 25% today.

The stock trades on a multiple of 22 times 2016 earnings per share and has a fully franked dividend yield of 3.2%. That's not unreasonable for a company with a clean balance sheet, economies of scale, shareholder-friendly management and decent growth prospects.

However, this result and management's forecast for next year serve as a reminder that sales can be volatile, and just because a company is riding the Chinese healthcare bandwagon doesn't mean growth is inevitable. We’re raising our price guide – and widening it – to give ourselves a larger margin of safety on the downside and to give the stock room to run should the rapid growth continue.

The stock is down slightly since Blackmores' bitter pill from 23 Sep 15 (Sell – $131.19) and we're upgrading to HOLD.

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